RICS UK Construction and Infrastructure Market Survey, Q3 2018

18-Oct-2018

Workloads continue to grow in the UK construction and
infrastructure sector, amid financial constraints and Brexit uncertainties,
according to the results of the Q3 2018 RICS UK Construction and Infrastructure
Market Survey.

In Q3 2018, 20% more chartered surveyors reported that their
workloads had risen rather than fallen (up from +15% in
Q2). Unsurprisingly, given the recent support from government,
private housing and infrastructure workloads reported the strongest rise.
Private housing workloads improved in Q3 with 30% more respondents reporting
a rise rather than a fall, up from +25% in Q2. Meanwhile, the infrastructure
sector also continued to strengthen this quarter, with 22% more respondents
reporting a rise in workloads.

Looking at the infrastructure sector in more detail, rail, roads
and energy are the subsectors expected to see the strongest growth in output
over the coming twelve months. Following the go-ahead from government on major
projects such as HS2, Heathrow expansion and Hinkley Point C it is likely that
these projects are underpinning the growth as work starts to get underway.

Meanwhile, activity across the private industrial and public
non-housing categories improved modestly with net balances of 9% and 11%,
respectively. A soft patch was most observable in public housing where the pace
of workloads slowed from +12% to +7%.

Regionally, workloads are now reported to be increasing across all
regions, with notable acceleration in the Midlands and East. The pace of
private housing activity was strongest outside of London and the South East
whilst Scotland and Northern Ireland saw the industrial and infrastructure
sectors contract.

Despite
the growth in recent workloads, financial constraints are reported by 75% of
surveyors to be by far the most significant impediment to growth. This is down
slightly from 80% in Q2. Anecdotal evidence suggests the difficulties to
accessing bank finance and credit, along with cash flow and liquidity
challenges are the main reasons for hampering current growth. Cyclical market
conditions are also making an impact. In an additional question introduced this
quarter, respondents were also asked how credit conditions have changed over
the past three months. 12% more respondents reported a deterioration rather
than improvement, with them expecting this to worsen over the next three and
twelve months.

Near term, the outlook for the sector remains upbeat. Respondents
have reported growth in the number of new business enquiries received and 42%
more respondents have reported seeing more new hires in their company over the
last three months.

However, the outlook for the economy as a whole has led to a
reduced optimism for the construction sector over the year ahead, with
respondents pointing to a softening in growth. 33% more contributors expect
activity to rise rather than fall, down from 41% in Q2, and a net balance of
25% foresee an increase in hiring. As the pace of growth has broadly moderated,
since 2014, anecdotal evidence suggests that the uncertainty generated around
Brexit, as the date to exit draws closer, is the main reason for the relatively
cautious outlook.

Brexit caution could also be a reason for the reported rise in
tender prices, as +61% and +50% more respondents continue to envisage greater
price pressures in the building and civil engineering areas, respectively. This
is up from Q2 and continues to signal rising input costs and shrinking profit
margins for businesses. Indeed, expectations for profit margins remained flat
in the latest results.

Jeffrey Matsu, RICS senior economist commented:

“While ongoing
capacity constraints have supported steady workload activity, the outlook going
forward is far from clear. Recent Brexit-related indecision has added
considerably to this uncertainty, but whatever the outcome, the pace of growth
is expected to decelerate if only due to cyclical market conditions.”

Hew Edgar, RICS head of policy commented:

“Despite
challenging market conditions and Brexit looming, overall construction output
in the UK is up on the second quarter of the year, and in particular it's very
positive to see that workloads for much needed new homes and infrastructure are
increasing. For three years our respondents have highlighted workloads rising
in private housing, however whilst driving the growth in construction,
the UK is yet to reach government’s target of 300,000 new homes per annum. The
last time the UK built more than 300,000 new homes per year was in the 1970s
when council houses accounted for around half of the total. Hopefully, this is
set to change following the announcement to lift the Housing Revenue Account
borrowing cap, which should encourage more local authorities to get back into
building.

“We’ve long
called on the government to secure funding to ensure
Britain’s exit from the European Union doesn’t impact the delivery of vital
infrastructure schemes, and encouragingly our latest survey revealed that
rail, roads and energy are the subsectors expected to see the strongest
growth in output over the coming twelve months, unsurprising given recent
announcements in these sectors.

“However,
the government must act promptly to put measures in place to keep the funding
from European Investment Bank (EIB) or introduce a new lender, or lending
mechanism, to plug the gap created from the potential loss of EIB funds,
particularly for big ticket infrastructure projects such as HS2, Hinkley Point
C and Heathrow’s expansion as these are of great importance to the UK.”